That's All Folks: Why the Writing Is on the Wall at Microsoft

This a guest post by Philippe Silberzahn, professor of strategy and innovation at EMLYON Business School, and Milo Jones, professor of strategy at IE Business School. They are finishing a book on strategic surprises at the CIA and blog together at silberzahnjones.com.

A control expert preparing for the eventual collapse.

Should you ever fire the chief executive of a company that just reported record third quarter revenues and double-digit operating income growth? According to Forbes contributor Adam Hartung, the answer is a definite yes. Despite stellar financial results, Hartung argues that Steve Ballmer has “singlehandedly steered Microsoft out of some of the fastest growing and most lucrative tech markets (mobile music, handsets and tablets) [and] in the process he has sacrificed the growth and profits of not only his company but ‘ecosystem’ companies such as Dell, Hewlett Packard and even Nokia.” And Microsoft's new tablet, announced this week, isn't about to be a game changer, as Hartung also argues. Indeed, the company has been trying to sell tablets since 1998.

This is yet another example of what I like to call the Wile E. Coyote syndrome. Like the unfortunate character in the old Warner Bros. cartoons, Microsoft now seems to be a company that has long since run off the cliff but, with legs spinning for all they are worth, doesn’t know yet that it is ready to drop. Yet drop it most certainly will.

To understand how this happens, take a look at the work of Arnold J. Toynbee, a historian who studied the rise and fall of civilizations. He argued that a civilization flourishes when it motivates insiders and attracts outsiders with its creative dynamism and culture. The civilization breaks down when its leadership loses this creative capacity and gives way to, or transforms itself into, a dominant minority. When this happens, the driver of the civilization becomes control, not attraction. And it’s precisely this switch from attraction to control that is the source of the breakdown. Interestingly, Toynbee says that the consequences may not be immediately apparent. A civilization can keep up momentum because the controls it puts in place generate some short-term efficiency. But eventually it will run its course and collapse, because no amount of control can replace the loss of collective creativity.

Observe this in the corporate world by looking at the example of General Motors. G.M.'s 2009 bankruptcy came at the end of a long decline dating back to the early 1970s, when Japanese cars first began to intrude on U.S. markets. Some researchers attribute G.M.’s breakdown to a decision made by its CEO back in . . . 1958. That was when the company decided that its divisional managers would no longer be part of its policy committee, putting an end to the fusion of strategy and operations. From then on strategy was increasingly detached from the field, and operations sat only at the receiving end of decisions made upstairs. Instead of being fully engaged in policy decisions, divisional managers were told what to do and how to do it. Perhaps not surprisingly, this was when G.M. opened the door first to Volkswagen and then to the Japanese, and the company experienced the first of many product flops with the Chevrolet Vega. The crucial loss of creative capacity was some 40 years in the making. Similarly Kodak was the darling of Wall Street for years as it was losing the digital war, a superbly managed slide to irrelevancy and collapse.

The same is happening at Microsoft. Until the late nineties, it was defining the software industry, and the best people in the field would automatically head for Redmond, because it was the cool place to work. But who thinks Microsoft is cool today? The company has no problem recruiting people, but it is no longer attracting the same sort of creative talent. Its focus is on perpetuating the past and make the organization run efficiently. It's still hugely profitable, but a look at its figures shows that, in simple terms, it makes money from its old core business and loses money everywhere else. In Toynbee’s terms, the creative capacity has long gone. At the helm is a man whose mastery of numbers and operational skills is legendary—in short, a control expert preparing for the eventual collapse.

Can that fate be avoided? Any growing organization must put in place management systems if it wants to avoid chaos, and to ensure proper performance. However, these systems can gradually paralyze the successful running of the business. Things that were done informally when the company was still small and entrepreneurial now require planning and approval, and the organization starts to shift its recruitment away from entrepreneurs and toward administrators. This intensifies when the company goes public. Financial analysts, investment bankers, lawyers, industry "expert,s" and management gurus all exert a growing influence on the thinking and actions of the management team at the expense of the creatives, the old guard of engineers and entrepreneurs.

Of course every growing business needs to put management systems in place, but they should never be allowed to stifle innovation. So how do you combine the two to avoid falling off the financial cliff?

As in so many matters, people are at the heart of both the problem and the solution. The people you recruit now will determine your strategy 10 or 20 years from now. They will ultimately determine whether your company keeps its creative edge or drowns in red tape and reporting. And it starts at the top: The idea that entrepreneurs should hand over the keys to experienced controllers such as Steve Ballmer is fraught with danger. It's a sure way for creativity to give way to control.

And when that happens, even a company as big as Microsoft may find that the writing on the wall clearly spells out “That’s All Folks!”

I became the Leadership Editor of Forbes in December 2008, just as the American business world was crashing down and taking the jobs and homes of millions with it. Had I started the job a year or two earlier, I might have found that covering things like how to be a manager,...